Beijing Beimo High-tech Frictional MaterialLtd (SZSE:002985) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Beijing Beimo High-tech Frictional MaterialLtd (SZSE:002985) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Beijing Beimo High-tech Frictional MaterialLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.047 = CN¥149m ÷ (CN¥4.2b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

So, Beijing Beimo High-tech Frictional MaterialLtd has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 4.3%.

See our latest analysis for Beijing Beimo High-tech Frictional MaterialLtd

Above you can see how the current ROCE for Beijing Beimo High-tech Frictional MaterialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beijing Beimo High-tech Frictional MaterialLtd for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Beijing Beimo High-tech Frictional MaterialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Beijing Beimo High-tech Frictional MaterialLtd's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Beijing Beimo High-tech Frictional MaterialLtd's ROCE

In summary, Beijing Beimo High-tech Frictional MaterialLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last three years. Therefore based on the analysis done in this article, we don't think Beijing Beimo High-tech Frictional MaterialLtd has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Beijing Beimo High-tech Frictional MaterialLtd you'll probably want to know about.

While Beijing Beimo High-tech Frictional MaterialLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com